Roth IRA FAQ
Roth IRAs were enacted in 1997 as part of the Taxpayer Relief Act. They were intended to encourage Americans to save more because the savings rate had dropped from 8 percent in 1980 to 0 percent by 1998. The Roth IRA offers investors who make less than a certain amount of money several tax benefits in exchange for saving money for retirement.
Other People Are Reading
-
Who Is Eligible?
-
To contribute to a Roth IRA, you must have an adjusted gross income of less than $169,000 if you are married and file your taxes together, less than $116,000 if you are single or head of a household, and less than $10,000 if you are married filing separately.
Contribution Limits
-
For the year 2009, individuals could contribute up to $5,000 to a Roth IRA. If you are over 50, you could contribute an additional $1,000. The limit for subsequent years is $5,000 indexed for inflation in $500 increments.
These limits are cumulative regarding all your IRA accounts, including traditional IRAs. So, if you are 43 and contributed $4,500 to your traditional IRA, you can contribute only $500 to a Roth IRA. -
Tax Advantages
-
Contributions to Roth IRAs are not tax deductible as contributions to traditional IRAs are, but the earnings on the funds are tax-free, and when you receive distributions from the account after age 59 1/2, there are no taxes on the withdrawals.
Penalties
-
If you contribute more than the annual limit, extra contributions are taxed at the rate of 6 percent. To discourage the use of Roth IRAs for any purposes other than saving for retirement, there is a 10 percent penalty on any money removed from the IRA before age 59 1/2. Any money withdrawn early is also subject to state and federal income taxes on top of the 10 percent penalty.
Exceptions
-
There are a few exceptions, known as qualified distributions, that allow you to withdraw money early without penalty. If you die or become permanently disabled, the withdrawals are not penalized, and you can withdraw money to pay for higher-education expenses and up to $10,000 for first-time home-buying costs.
Also, if your medical expenses for the year are greater than 7.5 percent of your adjusted gross income, you may withdraw money to pay for expenses above that amount. For example, if you make $50,000 in a year and your medical bills are $6,750, you could withdraw $3,000 without a penalty because that is the amount above the 7.5 percent threshold.
-
References
More Like This
Comments
-
Roth IRA
